Offshore IT services: east or west

Industry split into two rival camps

The offshore IT services industry is clearly split into two rival camps: east and west. Vendors from both hemispheres compete on price for the same clients' business. However, the obstacles that both groups must overcome differ. Understanding these differences, and individual vendors' survival strategies, is key to spotting the winners of this young but rapidly growing industry.

Client communication is one of the biggest challenges faced by offshore services providers based in eastern countries. Not only are their head offices further away, but eastern firms like Tata Consultancy Services, Wipro and Infosys will always be outnumbered in terms of 'feet on the street' by rivals like IBM and Accenture in western countries. This affects their ability to support existing clients as well as to win new ones.

Big Indian vendors are overcoming this barrier through increasingly sophisticated marketing techniques. These include getting referrals from prominent analyst firms, and targeting specific sectors and IT functions within clients' organizations.

This effort is clearly paying dividends. Most offshore businesses, particularly the top 10 Indian players, have already aggressively expanded in the West, and are setting up more and more "near-shore" sales centers in the West to strengthen their client relationships.

Of course, western companies such as IBM, Accenture, EDS, and Cap Gemini Ernst & Young can out-market their eastern rivals at any and every opportunity. They have large embedded client bases and a well-established global network of sales and development teams. However, although these companies have offshore service capability, they may not be in the best position to fulfill their potential.

Western companies need to reorganize their internal development and sales processes if they are to sustain offshore strategies. Their sales teams are not structured to win offshore contracts, which typically offer lower revenue, resulting in lower commission. Offering salespeople the right incentives to sell offshore deals eats away at lucrative margins. On top of this, western providers are not established enough to make best use of eastern workers. They often have to poach staff, at a higher cost, from local rivals instead of recruiting directly from training establishments or universities.

However, western companies do not face an insurmountable challenge. Large global vendors have the potential to realize their visions of perfectly balanced offshore, near-shore and onshore solution delivery. Nevertheless, it is clear that the challenges faced by western vendors means that their eastern rivals, particularly those from India, cannot be overlooked now or in the near future.